TMI Blog2015 (12) TMI 1824X X X X Extracts X X X X X X X X Extracts X X X X ..... a captive service provider need to be deselected from final list. Companies having turnover exceeding ₹ 200 crores is to be excluded from the final list of comparables selected by the TPO in the light of decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd [ 2015 (4) TMI 373 - ITAT BANGALORE] Companies with related party transactions exceeding 15% be excluded from the list of comparables chosen by the TPO. Inclusion of reimbursement of expenses in the operating cost as well as operating revenue of the assessee company - HELD THAT:- We find that the assessee company has received reimbursement of these expenses as cost from its AE and consequently the amount received/receivable is deemed to be at arm s length price. Hence this ground of appeal is allowed. Working capital adjustment - HELD THAT:- Advances received from AEs should be considered as a part of trade payables in the computation of working capital adjustment. Hence, the TPO/AO is directed to consider advances from ARM Ltd. UK and ARM Inc., USA in the computation of working capital adjustment and rework the same. This ground is allowed for statistical purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tile STPI unit. 5. The assessment was completed computing an income of ₹ 2,33,07,708. In dong so, the Assessing Officer made an addition of ₹ 1,08,39,448 on account of arm s length price (ALP) of international transactions entered into by the assessee with its Associated Enterprises (AEs) in respect of software design, development and maintenance services, pursuant to the order dated 26.10.2009 passed by the Transfer Pricing Officer (TPO). The AO also made an addition of ₹ 16,05,774 on account of re-computation of deduction claimed u/s. 10A of the Act. Aggrieved by the draft assessment order, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP upheld the order passed by the AO. Consequently, the AO passed the final order dated 26.07.2010 raising a demand for the balance tax payable of ₹ 1,12,22,415. 6. Aggrieved the assessee is in appeal before the Tribunal. 7. The details of international transactions entered into by the assessee are as follows:- Particulars Amount in R.s Outcome of TP order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Mindtree Ltd., Persistent Systems Ltd., and Sasken Communication Technology Ltd. ought to stand rejected in view of their turnovers being ₹ 595.12 crores, ₹ 527.91 crores, ₹ 448.79 crores, ₹ 209.18 crores and ₹ 240.03 crores, respectively, and thus beyond the upper limit of ₹ 200 crores by applying the turnover filter, as is consistently being held by this Hon ble Tribunal. 5.7 That, Geometric Software Solutions Co. Ltd. ought to stand rejected in view of its related party transactions exceeding 15% of its sales. 14. The ld. counsel for the assessee submitted that due to inadvertence and oversight, it had not raised specific grounds seeking the rejection of the above comparables. It was submitted that consideration of the aforesaid additional grounds will not require examination of any additional evidence and the assessee is entitled to raise the same. 15. The learned DR strongly objected to admission of above additional grounds and submitted that in case these were admitted, the comparability of the concerned companies has to be referred back to the AO/TPO for verification afresh. 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee s claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as Muulam which is used for civil engineering structures and the product development expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 13. As far as comparable Tata Elxsi Ltd., is concerned, the comparability of this company with that of the software service provider was considered by the Mumbai Bench of this Tribunal in the case of Logical Pvt. Ltd. IT (TP) 1129/Bang/2011 (AY 07- 08) wherein on the aforesaid company, the Tribunal held as follows:- 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- 7.6 Flextronics Software Systems Ltd. .. 7.7. Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the case of Trilogy E-Business (supra) has by applying turnover filter held that while selecting comparable companies for comparability analysis turnover will be a relevant criteria and held as follows: (1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of ₹ 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet s analysis, the turnover of ₹ 1 crore to ₹ 200 crores was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92- A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm s length price in an international transaction and it provides:- (1) that the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10B. (1) For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) . to (d) .. (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee s turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid companies from the list of comparable. 21. We direct the AO to decide whether the five companies viz., iGate Global Solutions Ltd. (Seg.), Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communication Ltd. (Seg.) and Flextronics Software Systems Ltd., having turnover exceeding ₹ 200 crores is to be excluded from the final list of comparables selected by the TPO in the light of decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd. (ITA No.1167/Bang/2010 dated 27.03.2015). 22. The ld. counsel for the assessee next submitted that 3 comparables at Sl.No.1, 2 18 of the final comparables of the TPO having more than 15% Related Party Transactions may be rejected as held in 24/7 Customer.com v. DCIT (ITA No.227/Bang/2010) and Cypress Semiconductor India Pl. Ltd. (supra). The observations of the Tribunal at paras 22 23 in the case of Cypress Semiconductor India Pvt. Ltd. (supra) in this regard are as follows:- 22. As far as comparable companies chosen by the TPO viz., Aztec Software Limited and Geometric Software Ltd. (Seg.) and Megasoft Ltd., are concerned, it is not in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables 10.56% +5% of the Appellant's Margin 16.08% -5% of the Appellant's Margin 5.03% Accordingly, we set aside the issue of determination of NCP margin to the file of the Assessing Officer. 28. The next issue that arises for consideration is with respect to inclusion of reimbursement of expenses in the operating cost as well as operating revenue of the assessee company. The TPO has included the reimbursement of expenses received amounting to ₹ 4,371,178/- as part of the cost base for applying the adjusted operating cost plus markup. In this regard, the assessee submitted that the reimbursement of expenses received by the Company was incurred by it on behalf of its AEs, following the policy of reimbursing such expenses on cost to cost basis and no services have been rendered by the assessee in relation to the reimbursements, therefore, reimbursements purely relate to third party expenses incurred on behalf of the AEs. It was submitted that the Company had received reimbursement of these expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 411 as on April 1, 2005 (schedule 8A of audited financial statements - Current Liabilities). The assessee s contention is that it receives compensation for their contractual services in advance and subsequently adjusts these advances against the invoices raised. Given that the assessee is a captive service provider, it may choose to invest such advances towards either purchase of assets or for incurring expenses, but ultimately such an advance is utilized towards performing contractual services. Therefore, it was the submission of the ld. counsel for the assessee that the advances received from its AEs should be considered as a part of trade payables in computation of working capital adjustment. The workings for average trade payables furnished by the assessee are as follows:- 33. Accordingly, it was submitted by the assessee that the working capital adjusted arm s length mark-up for the 20 comparables selected by the TPO would be 15.55% (after working capital adjustment of 5.13%) for software development services provided by the assessee. Based on the remaining 7 out of the 20 comparables selected by the TPO the assessee s margin of 11.52% is within the +/- 5% of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38. The assessee carried on software design, development and maintenance activities during the previous year from the undertaking registered with the STPI Authorities. The assessee claimed deduction of ₹ 9,12,57,120 u/s. 10A of the Act in relation to profits earned by tile STPI unit. 39. The assessment was completed computing an income of ₹ 6,36,40,660. In dong so, the Assessing Officer made an addition of ₹ 5,78,84,564 on account of ALP of international transactions entered into by the assessee with its AEs in respect of software design, development and maintenance services, pursuant to the order dated 30.09.2010 passed by the TPO. The AO also made an addition of ₹ 17,08,902 on account of re-computation of deduction claimed u/s. 10A of the Act. Aggrieved by the draft assessment order, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP upheld the order passed by the AO. Consequently, the AO passed the final order dated 20.09.2011 raising a demand of ₹ 3,07,35,220. 40. Aggrieved the assessee is in appeal before the Tribunal. 41. The details of international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal. 47. The ld. counsel for the assessee submitted that due to inadvertence and oversight, it had not raised specific grounds seeking the rejection of the above comparables. It was submitted that consideration of the aforesaid additional grounds will not require examination of any additional evidence and the assessee is entitled to raise the same. 48. The learned DR strongly objected to admission of above additional grounds and submitted that in case these were admitted, the comparability of the concerned companies has to be referred back to the AO/TPO for verification afresh. 49. After considering the averments of the counsels with regard to admission of additional grounds, we find force in the contention of the learned AR that by virtue of Special Bench decision in the case of M/s Quark Systems Pvt. Ltd (Supra), assessee can raise additional grounds seeking exclusion of comparables selected by it or not objected by it before the lower authorities. However, the Hon ble Punjab Haryana High Court in (2011) 62 DTR 0182 had upheld the Special Bench decision in the case of M/s Quark Systems Pvt. Ltd. ( Supra) specifically noting that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO s filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.55% 20.12% 3. R Systems 15.07% 9.64% 4. Sasken Communication 22.16% 10.57% 5. Tata Elxsi 26.51% 26.47% 29. In case of all the above comparables, the learned TPO has used segmental margins for comparability purpose. In all these cases, the revenues from software development exceeded 75% of the total revenues of the entity. Considering margins of Megasoft at the entity level would be inconsistent with the TPO s position in case of other comparables. It was submitted that a different approach was adopted in case of Megasoft possibly because in case of Megasoft, the margins at the entity level are higher than that at the segment level; whereas in case of other comparables (Eg: Kals, Sasken, Tata Elxsi, Geometric, R Systems) margins at the segment level were higher. It was submitted that learned TPO s approach is arb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and those companies are considered by the TPO for comparability but loss making companies are not considered as comparable, that would improper. The Tribunal found that such contradiction in approach should not be permitted. Similarly in the case of M/S. Sap Labs India Pvt. Ltd. 2010-TII-44-ITAT Bang-TP had observed as follows: 86. At the cost of repetition, we have to say that extreme cases should not be included in samples and extreme comparables mean not only the positive higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cost plus 6 per cent, or 1.5 times of the total wages bill, whichever is higher. This point we have to consider in the light of the fact that the assessee is working in a risk mitigated environment. That is why we have agreed with the argument of the assessee-company that there may not be extreme profits in the case of the assessee. When extremes are excluded from the samples, all sorts of extrem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Hence, cases of either abnormal profits or losses (which are referred to as outliners) get automatically excluded. In the arithmetic mean method, all companies that are in the sample are considered, without exception and the average of all the companies are considered as the ALP. Hence, a general rule that companies with abnormal profits should be excluded may be in tune with the principles enunciated in OECD guidelines but cannot be said to be in tune with Indian TP regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the Assessee to demonstrate existence of abnormal factors. 36. In the present case factors for abnormal profits have not been highlighted by the Assessee. In such circumstances it is not possible to accept the submission of the Assessee to exclude this company for the purpose of comparison. 37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 38. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO s filter of more than 75% of revenues from software development services. 51. Respectfully following the decision of this Tribunal in the case of Logica Pvt. Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd.(supra) followed the decision rendered in the case of Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT ITA No.1064/Bang/2011 for AY 07-08 order dated 23.11.2012. The following were the relevant observations in the case of First Advantage Offshore Services Pvt.Ltd.(supra): 18. As regards the group 2 companies which are to be excluded as functionally different based on the Tribunal s order in the case of Trilogy E-Business Software India Pvt.Ltd., we find that these companies are- 1) Accel Transmatic 2) Avani Cimcon Technologies Ltd. 3) Celestial Labs Ltd. 4) KALS Information Systems Ltd. 19. The Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd., while considering the issue of improper selection of comparables has held as under: (b) Avani Cimcon Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company s website, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. (c) Celestial Labs Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R D activities to develop new candidates drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh. According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO s order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in e-Business Consulting Services , consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ( KPO ) services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII- 04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies. (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 27. 28. As far as comparable chosen by the TPO at Sl.No.8 of the final list of comparable viz., M/S. Helios Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee by the ITAT Pune Bench in the case of PTC Software (India)Pvt.Ltd. ITA.No.1605/PN/2011 (Asstt. Year : 2007-08) order dated 30.4.2013. The following were the relevant observations of the Tribunal: 16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y comparable to the assessee s segment of IT-Services. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable has to be excluded as its RPT exceeds 15% in view of the decision of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 and Logical Pvt. Ltd. (supra). 60. This Tribunal in the case of NXP Semiconductors India Pvt. Ltd., (supra) has held that the RPT of Geometric Ltd. exceeds 15% and such company should not be taken as a comparable. The relevant observations of the Tribunal have been extracted at para 22 of this order while dealing with A.Y. 2006-07. Following the aforesaid decision, Geometric Ltd. is directed to be excluded from the list of comparables for A.Y. 2007-08. 61. Similarly, in the A.Y. 2006-07 in the assessee s own case, following the decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd. (supra), we have already held at paras 20 21 hereinabove that the companies viz., iGate Global Solutions Ltd. (Seg.), Mindtree Consulting Ltd., Sasken Communication Ltd. (Seg.) and Flextronics Software Systems Ltd., having turnover exceeding ₹ 200 crores be excluded from the final list of comparables selected by the TPO. Accordingly, Flextronics Ltd. is directed to be exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately ₹ 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions:- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 63. Respectfully following the decision of the Tribunal in the case of NXP Semico ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Mercedes Benz Research Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 2,935,123) 524,740,693 Operating Expenses (including reimbursement of ₹ 2,935,123) 470,998,591 Operating Profit (OP. Income Op. Expenses) 25,517,383 Operating/Net Margin (OP/TC) 11.41% 72. We have heard both the parties. We find that the assessee company has received reimbursement of these expenses as cost from its AE and consequently the amount received/receivable is deemed to be at arm s length price. Hence this ground of appeal is allowed. 73. With respect to the next issue of working capital adjustment, the ld. counsel submitted that though the results of +/- 5% of the arithmetical mean for software development services is achieved by applying working capital adjustment as computed by the TPO, the AO/TPO erred in not considering the advances received from the customers as part of trade payables in determination of working capital adjustment and thereby erred in not providing an appropriate adjustment towards working capital. It was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. This ground is allowed for statistical purposes. 77. The next issue relates to recomputation of deduction u/s. 10A of the Act. The assessee claimed a deduction of ₹ 9,212,57,120 u/s. 10A of the Act. In computing the deduction, the assessee had not reduced travel expenses of ₹ 93,35,997 and telecommunication charges ₹ 14,36,441 from export turnover as, according to the assessee, no part of the expenditure was attributable to the delivery of software outside India. The Assessing Officer, however, proceeded to recompute the deduction by reducing the said amounts from export turnover but not from total turnover and thereby disallowed the 10A deduction to the extent of ₹ 17,08,902. The assessee s submission is that no part of the above expenditure was attributable to the delivery of software outside India and in the alternative, if the same is reduced from export turnover it should also be reduced from total turnover. On the alternative submission, reliance was placed upon the decision of the Hon ble High Court of Karnataka in CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Kar). In this judgment, it has been held that whatever is excluded from t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
